Banking Awareness: Important Topics Fiscal Policy and FRBM Act, 2003 for IBPS, SBI and Other Bank tests

Fiscal Policy and FRBM Act, 2003

Fiscal Policy
The part of the government policy, which is concerned with raising revenue through taxation and with deciding on the amount and purpose of government spending. Fiscal Policy is the means, by which a government adjust its level of revenue and spending in order to monitor and influence and nation's economy in a mixed economy, a part from the private sector, then is the government, which plays a very important role. The role of the government in promoting economic development came into vogue after "The great depression" and is essentially a Keynesian prescription. Later Dr. Parthsarthi Scheme Committee was appointed in this regard to form various guidelines and recommendations for GAAR Policy.

Fiscal Policy, essentially has a multidimensional role. However, in India, in the centre of indicative planning.It influences growth performance of economy mainly by influencing the resource mobilisation and influencing the efficiency of resources allocation. It has two objectives.

• 1) Improving the growth performance of the economy.
• 2) Ensuring social justice to the people.

FRBM Act, 2003

The Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) has been amended as part of the Finance Bill, 2012. It has introduced two concepts to reform the expenditure aspect of the fiscal policy. FRBM Act was passed by the Union Government to provide a legislative control over the fiscal situation of the country, which had deteriorated earlier. 

The Salient Features of FRBM:

Government to annually reduce revenue deficit by 0.5% and fiscal deficit by 0.3% of GDP starting from 2004-05. Prohibits RBI from printing money to lend to the government. Elimination of revenue deficit and reducing fiscal deficit 3% of GDP by 31st March, 2009. Annually present macro-economic frame work statement, medium term fiscal policy statement and fiscal policy strategy statement. Under exceptional circumstances government may breach the target, but the Finance Minister will be required to make a statement in both houses of Parliament explaining the reasons. While some success was achieved in containing fiscal deficit in the few years after passing this law, as the fiscal deficit came down to 2.5% of GDP by 2008, due to economic slowdown post 2008, deficit have again shot up and the government has been struggling to bring them under control.

Assessment of Government Deficits:

Assessment of Government deficits can be done on following basis

Fiscal Deficit: It is the difference between what the government earns and its total expenditure.

Fiscal Deficit = Revenue receipts (Net tax revenue + Non-tax revenue) + Capital receipts - Total expenditure (Plan and Non-plan)

Revenue Deficit: It is the difference between the revenue receipt on tax and non-tax side and the revenue expenditure. Revenue expenditure is synonymous with consumption and non-development.

Revenue Deficit = Revenue expenditure - Revenue receipts.